Counterparties: Thundering herd immunity

March 12, 2013

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Last week, Eric Holder, the US attorney general, told a Senate committee something many of us had long believed. America’s banks, he worried, may have “become so large that it does become difficult for us to prosecute them.” Bank reform advocates weren’t happy about that statement, which referred to criminal prosecutions rather than civil settlements.

A few days later, Elizabeth Warren (fast forward to the 1:22 mark) sparred with Treasury and OCC officials over whether DOJ had done some kind of cost-benefit analysis with HSBC, which paid $1.9 billion to settle money laundering charges. The bank didn’t face criminal prosecution. DOJ criminal chief Lanny Breuer said last year it was important to “look at the collateral consequences” when prosecuting HSBC.

In his column today, Andrew Ross Sorkin, as Felix has done, makes the case for going after individuals, not whole corporations. DOJ guidelines, Sorkin notes, mandate that prosecutors take into account “the risk of harm to the public”. The government’s criminal charges against Arthur Andersen in the wake of the Enron bankruptcy punished innocent employees: the company’s failure meant 28,000 lost jobs — and a judge later overturned the charges.

Paula Dwyer calls for a “middle way” between no prosecution and putting a large institution out of business. She points to the DOJ’s recent settlements with subsidiaries of RBS and UBS over the Libor scandal, both of which involved the admission of criminal guilt in jurisdictions outside the US. Eliot Spitzer suggests a three strikes policy for banks: after a third guilty plea, “we will take you and we will restructure you and sell off the pieces of the bank.”

In his testimony, Holder added that the “greatest deterrent” is to prosecute individuals, not corporations. But since the financial crisis, the DOJ hasn’t criminally convicted a single major US bank executive. Before stepping down recently, Breuer put the problem this way: “If there had been a case to make, we would have brought it.” — Ryan McCarthy

On to today’s links:

Old Timey
Phibro’s Andrew Hall is now selling “handmade lavender soap and grass-fed beef” in Vermont – Max Abelson

New Normal
The rich are seeing the majority of gains in life expectancy — blame income inequality – WaPo
The most obese state in the nation is banning Bloomberg-style portion control – Quartz

Financial Arcana
EU accounting rules may have allowed banks to overstate assets and profits – Bloomberg

Big Ideas
It’s time to consider supply-side socialism – Chris Dillow

Good Ideas
Why we should expand Social Security – Josh Barro
“The obvious way to address Social Security’s funding problems is to increase benefits to the relatively poor” – Kevin Drum

EU Mess
Spain will spend $4.6 billion to reduce its 56.5% youth unemployment rate – Reuters
Spain’s unemployment rate is “reminiscent of the near-feudal agrarian state it used to be” – Guardian

The Fed
Investors are already starting to prepare for the day when interest rates rise – WSJ
The mystery behind how the Fed will unwind its unprecedented stimulus – Bloomberg

“Woodward’s account is not wrong. It’s just … wrong” – Tanner Colby
Bob Woodward and the deferential spirit – Joan Didion

WTF is MMT? – Dale Pierce

Godwin on Godwin’s Law - NY Mag

Small Enough To Fail
Insurers are charging more for policies covering executives at community banks – WSJ

A Bearded Lament
SXSW is “less organic and authentic”, says guy who’d rather be at the alterna-conference in Portland – Reuters

“A millionaire does not have the standing to tell regular people that money is overrated” – Hamilton Nolan

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“The government’s criminal charges against Arthur Andersen in the wake of the Enron bankruptcy punished innocent employees: the company’s failure meant 28,000 lost jobs.”

Not true.

As Dean Baker notes, and as I saw firsthand at while at Ernst & Young at the time, most Arthur Andersen employees, as part of wholesale practice groups or even entire offices, simply moved other large national or regional accounting firms, or spun off into new large consulting practices.

There was some administrative burden as part of that, to be sure, but unless the demand for accounting services changed (it didn’t), then those jobs were not lost, merely reshuffled.

The same thing would happen if large banks went down. A lot more complicated, but those jobs would not disappear; large operating units would be sold/moved to other corporate entities, with a small portion of jobs lost in the transition.

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